What are the advantages and disadvantages to becoming a subsidiary as opposed to starting your own company and can you keep control of a subsidiary?

Answer

Like all aspects of business, there are pros and cons to establishing a subsidiary as opposed to forming a new legal business entity. From an accounting perspective, establishing a subsidiary makes sense because there are considerable tax advantages and legal protections. The main tax benefit is the ability to offset profits and losses of one part of a business with another on federal tax returns. There are also tax benefits at the state and international levels. Some states allow subsidiaries to file tax returns only on the profits generated within the state's borders as opposed to those generated by operations in other locations. The same is true for many companies that set up shop internationally. Typically, the profits and losses of those subsidiaries will be taxed in the county where the subsidiary is incorporated and will not be subject to any income tax in the United States. There are also a handful of legal protections that come into play when forming a subsidiary. The most prevalent is the fact that liabilities and credit claims of a subsidiary are locked in that subsidiary and cannot be passed along to the parent company. As a result, the parent company's assets and credit standing are maintained even if the subsidiary runs into financial trouble. Another reason to start a subsidiary is that it allows for the creation of joint ventures with other companies with each owning a portion of the new business operation. Keep in mind that a subsidiary structure isn't the best option for every company. It has its pitfalls. Certain accounting processes become more complicated and the legal paperwork involved with creating a subsidiary can be lengthy and expensive. A subsidiary also has to be careful when borrowing money from a parent company. Certain guarantees can mean the end to certain financial separation that once posed an advantage. For smaller businesses without a board to answer to, keeping control is a no brainer. However, things become a little more complicated when a board has governing control of a company. Issues of ownership become more complex. Control also becomes an issue when a subsidiary is partially owned by another outside organization. For further clarification, is highly recommended that you consult your attorney or tax advisor.

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